HealthCo Healthcare and Wellness REIT (HCW) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the HealthCo Healthcare and Wellness REIT FY '26 Half Year Results Briefing. [Operator Instructions]. I would now like to hand the conference over to Mr. Sid Sharma, HMC Capital Managing Director, Real Estate. Please go ahead.

Good morning, everyone, and thank you for attending today's conference call. Joining me on the call today is HealthCo Fund Manager, Christian Soberg; and in the room is Financial Controller, Carina Luk. Before we commence today's presentation, we want to acknowledge the traditional custodians of country throughout Australia. We celebrate their diverse culture and connections to land, sea and community. We pay our respects to elders past and present and extend that respect to all Aboriginal and Torres Strait Islander people. Turning to Slide 5. We first need to acknowledge that the unit price for HCW remains well below unitholder expectations. We understand the frustration for many of our long investors that are seeking clarity to the Healthscope situation. What I can say is your Board and management team have not lost sight of this and HMC as the largest shareholder in HCW remains completely aligned with yours and our long-term objectives. Now I know everyone is eager to hear the Healthscope update. But before we do, a reminder of the portfolio performance. As many of you know, HealthCo has approximately $1.4 billion of assets, which includes $562 million of assets in the Unlisted Healthcare Fund. Healthscope represents approximately 60% of the asset base and corresponding income on a look-through basis. So in other words, the NTA of $1.39 is approximately a 60-40 split. On that basis, in our view, the current unit price clearly does not reflect fair market value. Importantly, the operational performance of the portfolio continues to deliver on all key real estate metrics. On this slide, we outlined the performance for the half. HealthCo delivered a resilient operating performance in the first half with 100% rent collection, 99% occupancy and 4.2% NOI growth. Financially, our FFO of $0.022 per unit was impacted by the unlisted healthcare fund pausing distributions as a result of the Healthscope situation. During the half, we further strengthened our balance sheet. Following further asset recycling, we had $155 million of cash and undrawn debt as at December, while gearing of 28.5% is well below our target gearing range. Portfolio valuation stood at $1.4 billion, which is a 2% decline on a gross basis, reflecting a 26 basis point expansion in cap rates. 70% of the portfolio was independently valued during the half, including all 11 Healthscope facilities. In summary, HealthCo is well placed as we continue to work on resolving the Healthscope situation. Preserving cash and pausing on distributions allows HealthCo to ensure long-term value preservation and maximize opportunities for future growth. Now moving to Slide 7, which is the update that many of you are eager to hear. Just a reminder, HCW and UHF collectively own 11 private hospitals in Metropolitan Sydney, Melbourne, Brisbane and Perth. These hospitals are critical health care services to the communities they serve and cater for over 370,000 patient episodes annually. Healthscope has paid 100% of all rent due up to and including February 2026. We get asked this question a fair bit. For clarity, this is 100% of the contracted rent with all deferrals that were previously provided having now been trued up and Healthscope is paying the full rent that is due and payable under the leases we agreed when we acquired the properties. The portfolio of these 11 hospitals was independently valued at $1.4 billion as of December '25, and the valuation represents $187 million gross increase on the original acquisition valuation in 2023 and ultimately reflects the critical infrastructure nature of these assets. Our conviction in our portfolio and strategy remains despite the challenge of our largest tenant and the corresponding impact on the unit price for our investors. Notably, the process that Healthscope has run to sell its balance sheet assets has already crystallized over $900 million of proceeds for the lenders that are now -- that have tipped Healthscope into receivership. We understand this is well above some of the lenders' initial expectations. Turning now to Slide 8 for an update on our discussions with alternative operators and the receivers. We have been consistent, we have been clear, and we have told the same story now for quite some time. We are working to provide continuity of service across all the 11 hospitals, ensure that the portfolio is tenanted by well-capitalized operators with strong operational track records. We want to do so while maintaining jobs for nurses and hospital staff and importantly, maximize long-term value for HCW unitholders and UHF investors. Our negotiations and discussions with our alternative tenant operators are well progressed. Today, we provide a little bit more color on these negotiations and provide an update to our investors who are eager to understand directionally where some of these discussions are heading. Our focus has been to end up with a diversified state-by-state portfolio split of our 11 facilities. As we sit here today, we have executable lease agreements in place for all 11, which includes a diversified group of future tenant operators for the facilities based on a state-based split. These agreements are consistent with HealthCo's key objectives, which we have consistently stated for the better part of the year. Under these agreements, the landlords will enter into new long-term leases with alternative operators. Commercially, face rents will remain unchanged, while rental incentives will be provided to the tenants to ensure sustainable commercial arrangements are in place for the long term viability for each of these facilities. Based upon the commercial agreements struck to date that are executable, this would indicatively result in a 10% to 15% reduction to near-term asset valuations. The landlords remain in constructive discussions with Healthscope and the receiver and noted that current rental payments are today up to date. In the event that the current operator and tenant does not meet its rental payments, we will enforce our legal rights under the existing lease agreements. Last week, we received correspondence from the receiver requesting that HealthCo consider revised ongoing rental arrangements for PurposeCo. We have not received any proposal or submission relating to PurposeCo, which we have noted has been widely speculated in the media as being a strategy that the receivers and the voucher hedge fund lenders are now pursuing. With no detailed information about PurposeCo, we are unable to comment on any proposal relating to PurposeCo. What is important is we have existing agreements and leases in place with Healthscope. Under the existing agreements with Healthscope, Healthscope and the receivers are entitled to submit to us proposals for an assignment of lease. Those proposals will be duly considered by HealthCo if and when received. As we all know, this process has frankly dragged out longer than most people have wanted. With the balance sheet assets from Healthscope now having been sold or agreed to be sold, we would encourage that if PurposeCo is a bona fide proposal that is well progressed and well considered that the receivers submit such proposal to us for consideration. And under the terms of the lease, we will review any application for assignment as we are required to do with our existing legal contractual obligations. However, we have alternative tenants in place. We're happy with the commercial terms that these alternative tenants have provided. These are tenants that have operated in the Australian health care landscape for a very long time, and they have long-term conviction in investing in the Australian health care system and ensuring continuity of service across all of our 11 hospitals. All of our agreements are completely consistent with our previously stated objectives. And in the absence of any proposal, we will continue to work with our alternative operators. I'll now pass over to Christian, who will take you through our half year results and portfolio update in more detail, starting on Page 10.

Thank you, Sid, and good morning. Our portfolio is diversified across hospitals, primary and specialty care, aged care and government and life sciences. We continue to manage a high-quality and highly resilient portfolio of 21 properties valued at $1.4 billion with a long WALE of 11.3 years. Operationally, the portfolio continues to perform well. Occupancy is 99% rent collection is 100% and like-for-like NOI growth was 4.2% for the half. Around 80% of income is CPI linked, giving us strong income protection in an inflationary environment. Geographically, the portfolio is balanced across the Eastern states, giving us exposure to Australia's largest population centers. Turning to Slide 11. Beyond private hospitals, our portfolio also includes cancer care centers, aged care facilities, health hubs and a nursing college. Government and national tenants account for over 80% of our income. These include Estia, one of the largest aged care operators in Australia; Mater, one of Queensland largest health care providers and Queensland Health. Turning now to Slide 12. On this slide, we highlight the attractive metro locations of our assets. 96% of our portfolio is located in metro areas in Sydney, Melbourne, Brisbane and Perth. Our assets are located in areas with strong population growth and therefore, benefit from continuing strong demand for health care services. Turning now to Page 13 for an update on our ESG achievements. Across the HMC real estate platform, we are undertaking a full review of our sustainability strategy to ensure our objectives are aligned with the next phase of the business. This work will give us a clearer direction and alignment across the platform, and we expect to share more detail once that project concludes. On the social front, we maintained strong governance around Board composition with 67% gender diversity at the HCW level. We're also upholding responsible investment practices by taking a deliberate and considered approach to selecting our tenants and service providers. This ensures we are supporting high-quality health care delivery and positive social outcomes across the communities we serve. Overall, we remain committed to delivering sustainability initiatives that drive both environmental improvements and positive social impact while reinforcing social strong governance discipline across the platform. Moving on to our development pipeline on Page 15. We have a strong conviction in the value of our development pipeline. That said, we will only seek to unlock its $500 million pipeline once the Healthscope situation has been resolved and only once funding partners and anchor tenants have been secured. Moving now to the financial results, starting with the earnings summary on Page 17. FFO of $0.022 per unit was affected by the non-declaration of distributions from the unlisted health care fund. HCW did not declare distributions in the first half in order to maintain balance sheet flexibility. We expect that both HCW and UHF will recommence distributions once the Healthscope situation has been resolved. Moving on to the balance sheet on Page 18. We further strengthened the balance sheet in the first half with drawn debt reduced from $447 million to $372 million. NTA as of December was $1.39 per unit with the movement from June, primarily driven by an expansion of the portfolio cap rate by 26 basis points. 70% of the portfolio was independently valued, including all the Healthscope assets. Turning now to capital management on Page 19. Our capital management has remained prudent as we preserve liquidity and strategic flexibility. Following $77 million of asset recycling in the half, HCW had $155 million of cash and undrawn debt as at December. Gearing of 28.5% is below our target range of 30% to 40%. Finally, HCW is 81% hedged. Now turning to the FY '26 outlook on Page 21. In FY '26, our focus remains on resolving the Healthscope situation. Our key goal is to ensure continuity of services at our facilities in order to protect long-term value for HCW unitholders. We continue to make progress in this regard. We will continue to manage our capital prudently and don't intend to declare distributions until the Healthscope situation has been resolved. Until such time as that is achieved, it is not appropriate to provide guidance for FY '26. In closing, we'd like to thank our Board, our unitholders and all our tenant partners. And I'll now hand back to the operator for Q&A.

[Operator Instructions] Your first question today comes from David Pobucky with Macquarie Group.

Update on Healthscope as well. Just the first question on the 10% to 15% reduction in near-term asset valuations. Does that mean a 10% to 15% incentive? And you talked to -- I mean, can you talk to the wording you use around near-term reduction as well? And what would be the duration of the potential incentives, if you can talk to that, please?

David, yes, so what we're talking about today is these agreements, they're part of a commercial solution to put in place long-term and sustainable lease arrangements with the alternative tenants who as Sid was saying, are high-quality operators with strong operational track records and strong balance sheet. The terms include long-term leases, while face rents will remain unchanged. The incentive component is broadly consistent with leasing transactions in the health care sector and HCW has the balance sheet to be able to provide these incentives. The incentives are structured in the sense that the valuation impact will reflect the accounting treatment of those incentives over the lease term. And we have stress tested the impact of these deals on the covenants. And I think from a key takeaway, David, is that from a portfolio perspective, these arrangements extend the portfolio WALE, put in place high-quality operators, provide portfolio diversification, and we believe that the deals will strengthen the long-term quality of HCW's earnings.

And David, you'll see on the footnote where we've remarked on that, that's assuming cap rates hold steady. So currently, the cap rates reflect some level of uncertainty around Healthscope's covenant. So with new operators theoretically moving in, you may make some assumptions around what impact that could have on capitalization rates, but we just wanted to provide a bit of color as to directionally where these alternative deals are heading because it is a key question that gets asked, and we're comfortable sharing that.

Okay. And maybe just following up on the comment around stress testing the impact on covenants. The ICR was 2x at the first half versus that 1.75x covenant. Where do you think that sits if your alternative arrangements were put in place with that incentive that you're outlining?

Yes. So David, the way the incentives are structured, these will be treated as below the line items and won't impact on EBITDA. So that won't impact on ICR.

And just the last one for me. Just on a go-forward basis, what effectively needs to take place now for you to appoint those alternate operators? And what are the range of potential paths and outcomes from here and timing? I know you mentioned this has taken longer than expected.

So we've had really constructive discussions with the receivers and their advisers and the receivers and their advisers are in an unusual situation, juggling the interests of these foreign voucher hedge funds while making sure that the health care system remains available to serve the communities. So they're in a really difficult spot. We have worked constructively with them. The pathways from here are we work out a nice friendly deal with the receivers, which has an orderly transition to our operators. Alternatively, if they wish to submit an assignment application, contractually, we're obliged to review it, and we will review it having regard to our existing rights under our leases. And thirdly, they may decide to withhold the rent and otherwise to repudiate on their obligations under the lease. We hope it doesn't come to that. But they're probably the 3 options from here. As far as PurposeCo goes, David, we've -- despite all of our discussions with receivers and their advisers, what all we know about PurposeCo is what you guys have read in the paper. So we've had all sorts of other discussions, but we're yet to receive any information about PurposeCo at all. And I think their public remarks said they're trying to bring it to a conclusion by midyear, but we've heard it before, so we'll wait and see.

The next question comes from Andrew Dodds with Jefferies.

Look, just, I guess, a bigger picture one. It will be 2 years next month since this news first broke around Healthscope potentially going into administration. I'd just be interested to hear a bit of an update on your relationship with the unlisted fund investors. And I guess, just on the fund itself, those investors receive a distribution in the half? Or are they on pause, too?

Thanks for the question, Andrew. Yes, I agree that it's been going on for a while. Just to clarify, though, the receivership is at topco level for Healthscope. And a reminder, the contracting entity is that the tenants under our leases are not in receivership or administration. So the structuring is happening at topco level, which in and of itself is interesting if you're into Corporations Act and have some spare time. The Unlisted Fund has also paused distributions and are working shoulder to shoulder with HCW. Clearly, the view with unlisted investors is a bit different given they haven't had the mark-to-markets that listed investors do, but they remain long-term participants in the sector, and they remain ready willing and able to continue to invest in the health care sector.

All right. That's clear. And then just on the $77 million of asset sales in the first half, are there any more to go? Or do you think the sort of liquidity on the balance sheet and the headroom to your gearing target range is comfortable for these renewed tenant negotiations and the percentage for incentives?

We're comfortable. We can do more if we need to, but I'm pretty relaxed.

Your next question comes from Lauren Berry with Morgan Stanley.

I just want to pick up on a comment in the presentation pack around that you have liquidity to fund the lease arrangements contemplated with alternative operators. Is there an element of upfront CapEx or payments that you are envisioning that you might have to make with these new tenants, potential new tenants?

Lauren, it's predominantly rent freeze, and it's kind of to provide a glide path for incoming operators, but there is some small elements of cash as well.

Okay. And is there any kind of sunset date on the agreements you have with the alternative operators?

I'm not going to go into that here, Lauren. No.

Cool. And last one, look, saw Proxima had a bit of an occupancy dip in the half. Can you just comment on what's going on with that asset, please?

Yes. So the occupancy at full year '25, Lauren, was impacted by rent guarantee. Just to reiterate around Proxima as well, it's an attractive location next to Gold Coast University Hospitals and next to Gold Coast Private Hospital, which has just been acquired by the Mater through the Healthscope sale process. Mater is also an existing tenant at Proxima, which is anchored by Queensland Health. Occupancy there now, Lauren, is just under 90%, and we expect occupancy to continue to rise throughout calendar year '26.

And we've been getting better rents than we anticipated at Proxima. So we're pretty relaxed about getting the last 10% away. And yes, given the changes that have occurred across the road and just -- Christian just touched on it. So the Gold Coast University Hospital was a Healthscope facility, not in our portfolio. It was a balance sheet asset. Now to give you some color, that's sold for $365 million to the Mater, which are Queensland's largest non-for-profit hospital group. Now if you look at the $900 million of sales that have been generated, the earnings multiple these assets have traded on are between 11 and 15x. What the read-through should be there, Lauren, that might be helpful is the payout ratios from insurers to hospital operators has increased from 82% as short as 3 years ago to about 86%, and it's well on its pathway to about a 90% payout ratio by this calendar year. So the operators are starting to recover post COVID and get back into kind of run rate utilization that was pre-COVID. And more importantly, that delta between 82% to 90% represents somewhere in the order of $1.2 billion of cash from insurers to the operators, which is quite material for the whole industry.

I just wanted to follow up on the incentive comment. So just to confirm, you're talking about the incentives will predominantly be rent-free periods upfront on the lease rather than an abatement across the term of the lease. Is that correct?

No, that's not what I said. I said it's predominantly rent-free smooth over the term of the lease. So I'm not going to get into -- Lauren, you can understand, right, where these are commercially sensitive discussions. We've been specific on our remarks that the impact is to valuations to provide you with some color as to directionally where things are landing. Now in terms of the individual breakup and split, what I will say is you won't have a rent-free cliff. We won't create that, and we won't front end all of it either, okay? We want to provide these operators long-term sustainable solutions and the support we will provide will be over a medium-term period.

Your next question comes from Andy MacFarlane with Bell Potter.

Just one for me. Just interested in an update on trading at the hospitals. I think you just talked a little bit about utilization improving, but just interested in some color on how things are going there.

If you look at the sector-wide data and statistics and sort of the listed peers, you'll see their operating performance generally in the industry is certainly improving. I've just provided some color as to the health insurers starting to come to the party with appropriate levels of pass-through to the operators. Our hospital operations are still treating patients that utilization and throughput has improved. However, we don't have at the moment, all of the data that Healthscope ought to be providing to us relating to operating performance that they're obliged to provide under their leases. So I don't want to go into any more than that. If we had it all, I'd share it with you.

Your next question comes from Richard Jones with JPMorgan.

Just a couple of quick ones. Can you step through what the underlying earnings are of UHF? It looks like it's taken about a $16 million loss in the account and just doing quick sums, it looks like the reval are down about $20 million. Just working out if there's any other items to call out that would suggest where the underlying earnings for UHF are?

Yes, [ Liam ], we won't comment specifically on UHF. But in respect of the portfolio in UHF, the cap rate movement was similar in UHF, similar to the cap rate movement for the Healthscope assets at HCW balance sheet level.

I mean it's obviously a reasonably material investment for HCW. So isn't it reasonable to ask for what the underlying earnings of that investment are?

Yes. So in terms of the -- what's recognized in HCW, the loss associated with equity accounted investment, that's predominantly related to fair value movements associated with the assets in the Unlisted Fund.

Yes. Just to add to that, [ Liam ], every dollar of rent because that portfolio is entirely Healthscope, right? Every dollar of rent has been paid to -- across all of those hospitals in that portfolio.

Yes. I'm just trying to reconcile the underlying run rate of UHF because our assumption is we'll be making about $40 million on a 100% basis annually, so call it $20 million for you guys, but it looks like it's only generating about $4 million in underlying earnings if I look at the revals half-on-half and then the $15.8 million disclosed equity accounted loss. So I'm just trying to reconcile what the difference is and if there's any other one-offs that we're missing.

No, maybe we take that modeling question offline. None of that kind of adds up to us. It's all pretty clean. So why don't we circle back to you on that?

Okay. No worries. And the UHF distribution, will that be backdated when it comes back online?

No decisions have been made on distributions at this stage.

Your next question comes from Liam Schofield with Morgans.

Just to touch on Richard's question a moment ago. Just on that potential payout of accrued rent, that is a decision that I suppose is open to you guys looking at that you may pay out that rent that you've received historically at some future point? And then also, just what sort of cash flow implications would be required under these alternative tenants for any handover provisions while still ensuring that continuation of service?

No decisions on distributions have been made by the unitholders in the unlisted fund or HealthCo in the listed fund. So the priority remains to resolve the Healthscope agreements and transition. That's the focus at the moment. There's a lot of levers subsequent to that, whether that's distributing the accrued rent that has been collected in full, whether that's further balance sheet and capital management, whether it's asset sell-downs, there's plenty of other levers. The focus for this team is just to resolve this Healthscope situation first and foremost. I know distributions are an important metric and requirement for a lot of our investors, but we are doing the prudent thing here by preserving balance sheet flexibility as we work through what is a frustrating situation for our investors.

And just on any cash flow implications if under that alternative tenant scenario, obviously, there will be some handover window to ensure continuation of service. Is that likely to have a cash flow drag?

Too early to say, unlikely based on current thinking, albeit, a lot depends on whether this PurposeCo that's been spooked in the papers is real or not.

Your next question comes from Callum Bramah with Macquarie.

Just a couple going back to the guidance around the potential asset devaluation of an alternative arrangement. Can you just try and lay out a little bit about the drivers of that? Because if it's an incentive over the medium term, I would have thought the incentive needs to be quite large because I would have thought your valuation sits in the terminal? Or are you actually also assuming some sort of cap rate expansion for the incremental risk?

Callum, so what we've said today is that reflects the accounting treatment of those incentives over the lease term. And what we also -- Sid has also mentioned that it is being made by reference to the cap rate as at half year, although again, to reiterate that we believe that cap rates, all things being equal, should compress going forward, having regard to stronger tenant covenants associated with the new alternative hospital operator.

So sorry, to be clear, are you assuming the cap rate compresses in that we can new lease...

No, no, -- that's not what I said. That's not what I said.

The footnote really says that there is no cap rate compression assumed on that statistic. Use that range directionally as you're kind of modeling out where incentives are heading to, okay? So these are going to be dominantly new long-term leases. Anything more than that, I'm uncomfortable providing at the moment because we're still in negotiation phase.

Yes. That's fair enough. I get it's kind of commercially sensitive. I just understood that previously the guide was sort of a 10% to 15% incentive over a period of time, but it would suggest if the valuation impact is of that order, it's got to be a bigger incentive.

No, we've never previously guided specifically to the incentives, but your assumptions around that range are still on the money. So we're happy to walk you through it in terms of the mathematics behind it. But I think we're all saying the same thing.

Yes. Okay. And then just -- I know it's an odd kind of observation, but when you look at the HCW cap rate at 5.91% versus your HDN one at 5.51%, a 40 basis point spread doesn't really seem a lot given the amount of risk that's sitting in the portfolio at the moment?

From an asset fundamentals perspective, we are real estate owners, and we have collected every dollar of every contractual commitment provided by our operator since the day we've done that deal. It reflects an appropriate level of risk for the critical infrastructure characteristics that these hospitals have.

Maybe just one last one. Just around the alternate proposals. Can you just confirm that under the alternate proposals that the EBITDAR to rent is above that sort of industry norm of 2x, potentially, I guess, in 2 parts, one, while you're providing the rebate, but also once the rebate rolls off?

That's the working assumption, long-term sustainable rents for operators that have a long-term commitment to the health care sector. So you can assume that the rental rates are appropriate and well benchmarked to market having regard to each hospital, its underlying performance and the way the sector is frankly recovering really fast.

The next question comes from Andrew Dodds with Jefferies.

Sorry, just a follow-up. There's just -- there's a payable of about $14 million sitting on the balance sheet. Can I just confirm is this relating to the fees being accrued to HMC but not cash paid? And if that's the case, when the cash starts to be paid?

Yes, that's correct, Andrew. These are fees due and payable to HMC. HMC in its demonstration of alignment with investors has paused any cash payment. No decisions have been made as to when that will be turned on. But you can expect that subsequent to a resolution of this Healthscope situation is when we will have a further discussion and review that.

Thank you. That does conclude our question-and-answer session. I'll now hand back to Mr. Sharma for closing remarks.

Thank you all for making the time to join us on this Healthcare call. Look forward to catching up with all of you. And yes, look, we're -- like all of our investors, hoping that our receiver friends are going to submit something forward and bring this thing to a head now. So look forward to catching up with you.